For some reason I cannot see the following piece by Fleckenstein in an easy-to-read format and am copying it rather than linking. I seldom post long items like this but this is partly so i can read it easily myself:
EDIT: forgot to provide link:
moneycentral.msn.com
If Rip van Winkle had lain down for a nap at the height of our stock-market mania and overslept to the present, he would be hard-pressed to notice much change. Portfolios, of course, have shriveled. The Street has been swept clean of a few crooked chieftains. But otherwise, it's business as usual. Corporate America and its lackey analysts continue to play beat-the-number. The media assign this coverage to the financial pages, rather than the funnies. Meanwhile, two years and counting after the mania's demise, the people who run other people's money still have their track shoes on, chasing performance.
Wall Street is the scene of a dramatic disconnect. It is powered by the mindless motion of the people who play with other people's money. Just check the closing box scores on any number of days. Whether it's retailing, finance or "blue chips," stocks outside of technology just do not seem to want to hunt on the upside. In hot pursuit of performance, the OPM crowd unloads the shares of sound, mundane businesses while bidding up the price of technology companies that are dependent on these very businesses for their livelihood.
Paying up for peril
While on the subject of price, I would just like to make a comment about how it relates to danger. Many times in markets, you find yourself in a situation where there is a lot of danger, but usually that danger is accompanied by lower prices. For instance, these days, people are all concerned about Japan, but the prices in Japan are in some areas downright cheap, even if the entire index isn't. Whereas right now in the U.S. market, the danger we face commands a high price.
There is a lot of lip service to deflation, but the reality is that we have an economy that's been unresponsive to 11 rate cuts, and that, in my view, is weighed down by the aftermath of the bubble. (More about that below.) Meantime, we might be seeing the dollar start to come unglued. This scenario is risky enough, even with a cushion of low valuations. But to enter a period of danger and still pay high valuations is the height of lunacy.
Landing in the orchestrated pit
Shifting to the musical section of the Chronicles, let's stop for a look at the fiddle in the DRAM market. As I noted a few weeks ago in my daily column on RealMoney, I expected DRAM prices to begin to sag when the calendar turned to mid-November, and Micron Technology (MU, news, msgs) was near the end of its quarter. This is, in fact, what has happened. I rarely comment on my previous comments, but in this case, I thought it would help to underscore the stunning way that grown-ups behave. Amazingly, they continue to act as if what goes on in the DRAM market is meaningful, despite the obvious and predictable manipulation there. So, for all of you who follow the DRAM market as an indicator of what comes next, or who follow Micron as a speculative barometer, as I do, I think it's worth knowing that this little ruse appears to have run
its course.
Mad bull and bear disease
Now I would like to get a few items off my chest that have been bugging me. First of all, I think it is silly to believe what the papers and the TV say about Iraq being the reason for day-to-day motion in the market, even though war-related headlines do spark momentary flings on the tape. However, the whole thing is so muddled that any outcome now can be bullish or bearish.
As the so-called thinking goes, most everybody believes that the war will be bullish, as was the case back in 1991, and most recently in Afghanistan. So, buying the outbreak of war is the wise-guy trade. On the other hand, every time the prospect of war looms large, it is deemed to be bearish, and the market is sold (and, when it looks like war will be put off for a while, we get a rally). This disconnect seems to escape the notice of the media, which continue to drone on about how Iraq "matters" to day-to-day trading. When you read and hear these pronouncements, know that they are ill-informed.
Number-beating a retreat
Of course, one can still count on the mainstream media to regurgitate the same sort of nonsense earnings numbers that were tossed around during the mania. And that brings me to the subject of how little things have changed several years after the peak. Obviously, the number of believers has shrunk, and the amount of money people have to throw around has diminished, but the game is the same. Stories are still reported breathlessly about companies that beat the number, as if beating the number makes any difference.
Meanwhile, very little attention is focused on value, or what the current stock price, and therefore market capitalization, implies about a business. The negative implications of a cheap valuation might be overdone, just as the positive implications of a higher valuation might be overdone. But that kind of critical look takes a backseat to the "analysis" of what a company did versus expectations.
For example, in the last few days, much ado was made of the reaffirmed guidance from Texas Instruments (TXN, news, msgs) and Motorola (MOT, news, msgs). Did folks in the financial media just have a lobotomy? Not long ago, both of these companies had to lower guidance. Yet now they come out and crow about being able to beat the new, lowered guidance, and heads just go bobbing about how that's supposed to be good news.
Fanfare thee well
As long as we're in telecom land, I would just stop for a moment to point out a recent story in The New York Times titled "NTT DoCoMo reports a slight profit." For everyone out there who is waiting for the third generation to drive the wireless market, the lesson here is, be patient. As the writer points out: "Subscriptions for the new phones are more than six months behind forecasts. . . . The company has trimmed the amount it plans to invest in the service and will continue to rely on upgrading its older second-generation handsets. . . ." So, this is an example of a new-technology product that was just a bridge too far. I'm sure it will be incorporated some day, but until then, we'll just have to sit back and watch a whole lot of arm-waving about how it's going to be the next leg of the wireless market. From this juncture, that looks pretty unlikely to
happen any time soon.
In any case, this hype is part and parcel of what goes on in technology during the "no news" period. Every quarter, we see the DRAM fiddle I mentioned. There's always some sort of inventory build for one product or another. Most recently, it's been wireless, and a little bit of a PC uptick in front of Christmas. Or take the fabled upgrade cycle that people keep looking for. Ladies and gentlemen, there's a big difference between no PC sales and no growth. PCs are still being replaced. We're still selling 100 million-plus every year, so the upgrade has been happening slowly. There's no big hockey stick out there, however, because there's no crying need for a wave of new machines. Yet, it seems like every time a couple of orders are logged, the noise is trumpeted as a big deal.
And who are these spin specialists? Why, the same dead fish whose tired "analysis" still has people paying attention, even though it hasn't worked for years. So, here is just another example of how nothing has changed in the aftermath of the mania. Corporate America is still playing the game, and the dead fish, who haven't learned much, are all there, enticing people to join in. And of course, the people who play with other people's money have bigger fish to fry. They just keep chasing the tape so they don't get left behind during any rally. So, we sit here playing a game of three-card monte, as if the calendar were back in early 2000.
The whiff of epiphany
Though people continue to act like it's business as usual, the economy is telling us a different story. The story of why it won't respond to all the rate cuts, as I have said frequently, is that we are dealing with the aftermath of a bubble. After you have a bubble, business does not return to normal. The things that used to be effective, like rate cuts, don't work. All they do is postpone the day of reckoning. I continue to be amazed by the fact that so few people seem to grasp that. Any moment now, they expect the turn that won't be coming. I just wonder what it's going to take for them to wake up and smell the coffee.
Finally, I would just like to ruminate for a second on how poorly our market responded to the recent better-than-expected news regarding the rate cut and the election. Basically, the market spent about 15 minutes going up that day before selling off. In fact, except for the speculative playthings in technology, the rest of the tape couldn't hold a bid.
I continue to believe that this is a very negative sign, and that the rally has seen its best prices. I think that there is plenty of downside for the market, especially when one takes into consideration what has been happening to the global stock markets, as well. The low we set in October, ladies and gentlemen, was no more the bottom than any of the other lows were the bottom. In my opinion, it was just a place from which we rallied. So, factor that possibility into your decision-making.
William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column for TheStreet.com's RealMoney. At time of publication, William Fleckenstein owned none of the equities mentioned in this column. Positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC on MSN Money. |
